The document discusses various tax-advantaged retirement plans such as IRAs, 401(k)s, and 403(b) plans and how they allow pre-tax investing and tax-deferred earnings. It also covers different types of trusts like charitable remainder trusts that have tax implications. The summary describes key retirement income sources including social security, employer plans, and individually provided savings as well as strategies for estimating needed retirement income.

1. Taxes & Retirement 2
Donna M. Kesot, CPCU
CPCU 556 Personal Financial Planning
May 2, 2012

2. Principal

3. Generally, creation of a formal irrevocable trust into which the
donor (as grantor of the trust) places property that is subject to the
trust
Aka CRT
2 types:
1. CRUT Charitable Remainder Unitrust(5-50% of each year’s
current value, up to 20 years)
2. CRAT Charitable Remainder Annuity Trust (5—50%,
calculated on the initial value of the property)

4. These plans allow individuals to invest pre-tax
and provide tax-deferred earnings
Traditional IRA
401(k) plans, other than Roth
403(b) plans, other than Roth
457 deferred compensation plans

5. Sum of capital appreciation (or losses) on the principal and
The income earned on an investment over a specified period
Tax implications: Tax rate applied to gains from capital
appreciation is often lower than those applied to gains through
investment

6. Match the concept
Capital Gain Profit earned when sold
Like Kind Exchange Original value
Principal Selling Prices exceeds Purchase Price
Rate of Return 1031
Realized Capital Gain Annual Profit or Surplus

7. • Individually Provided (IRAs, cash values of Life ins, nonqualified
annuities, savings)
• Social Security – guaranteed income floor, available at age 62
 Retired Worker’s Benefits - equal to worker’s primary insurance
amount (PIA) at age 65-67.
 Spouse of Retired Worker (50% of retired worker’s PIA)
 COLA tied to CPI
• Employer-Provided Retirement Plans
 Qualified pension plans
 Profit-sharing plans
 Savings Plans

8. Dollar Cost Averaging
Systematic investing of the same amount of money in the same stock or
group of stocks over a period of time
Investing in the same volume of stock or group of stocks over a period of time,
regardless of the changing share prices
Diversifying the bond and CD portions (fixed income) of an investment portfolio
by staggering the maturity dates of instruments.
Systematic investing of the same amount of money in the same stock or
group of stocks over a period of time, regardless of the changing share
prices
A&B
Right Answer: D Systematic investing of the same amount of money in the same stock or group of stocks
over a period of time, regardless of the changing share prices

9. Method used to estimate needed retirement income based on a
percentage of expected final average earned income.
60-80% because
1. Taxes usually decline
2. Certain work related expenses may end or reduce
3. Home-ownership expenses may decline if mortgage debt is
eliminated
4. Support for dependent children may have ended
5. Senior discounts (Go AARP)
6. General expenses may decline as the aging individual
become less active/more sedentary

10. Laddering
Diversifying the bond and CD portions (fixed income)
of an investment portfolio by staggering the maturity
dates of instruments in the portfolio

11. The apportioning of investments among
categories of assets

12. A category of hybrid funds that are
Required to maintain a fixed weighting (assets allocation)
of stocks, bonds, and perhaps money market instruments
May enable investors to implement an asset allocation strategy
through the purchase of one mutual fund, rather than several
funds or other assets
AKA Life-Cycle Fund

13. Inflation Risk
Default Risk
Interest Rate Risk
Long term bond investors minimize these risks compared to
real estate and stock investments

14. Meets Section 7702 IRC via
1. Cash value accumulation test
• A test that limits cash value relative to death benefit.
2. Guideline premium and cash value corridor test
• A test that limits premiums paid relative to the death
benefit.

15. Match the stock concept
Growth Stock Undervalued
Penny Stock Not tied to economic cycles
Defensive Stock Faster than general Economy
Cyclical stock Trades at <$1
Value Stock Industrical producers

16. A 403(B) is a qualified retirement plan that for
employees of local, state, or federal governments
and agencies.
TRUE or FALSE?
Real Answer:
A 403(b) PLAN IS A TAX FAVORED RETIREMENT PLAN FOR
EMPLOYEES OR CERTAIN NONPROFIT ORGANIZATIONS

17. The development and implementation of strategies designed to
reduce, change the timing of, or shift income tax liabilities

18. The use of legal methods to reduce or
eliminate taxes
e.g. Shifting assets to children, Charitable
remainder trusts, investing in tax free
munis, using normally taxable distribution
from nonqualified deferred annuities to pay
charges for long-term care insurance tax-
free, and taking qualified distribution from a
Roth IRA

19. Tax planning strategy that enable taxpayer
to delay the recognition of income for tax
purposes
e.g. 401 (k) plans, IRAs, Deferred
annuities

20. • A dividend paid by a U.S. corporation, a
corporation incorporated in a U.S. possession ,
a foreign corporation located in a country
eligible for certain U.S. tax treaty benefits, or
a foreign corporation whose stock can be
readily traded on an established U.S. tock
market and which meets applicable holding
period requirements.

21. Deduction = Amount that reduces an individual’s
income subject to tax.

22. Gain realized on the sale of a capital asset held for one year or less
In contrast a long term capital gain is a capital asset held
longer than 1 year.

23. Adjusted Gross Income
Functions as the base amount on which certain limits are
calculated (floors for medical expense, mortgage interest,
personal casualty/theft losses, and miscellaneous itemized
expense deductions
Determines charitable contribution limitations

24. Property owned at death
Life Insurance on the Decedent’s life
Joint Tenancies (gross estate of first joint owner to die
includes ½ of the value of property jointly held or the full
value of a property jointly held with someone other than a
spouse
General Powers of Appointment –Property held by the
decedent with a general POA
Annuities, Revocable Transfers, Transfers taking effect at
death, Transfers within 3 years of death

25. Meets statuatory definition of life insurance in IRC but
Fails to meet the seven pay test
Does not affect death benefits but living benefits lose preferential tax
treatment
Premiums in 1st 7 years exceed sum of net level premiums that would have
been paid if the policy provided for paid-up future benefits